Wednesday, September 23, 2009

A reader for the Group of 20 (G20) Pittsburg-financial summit

The Group of 20 (G20) financial summit convenes in Pittsburgh, Pennsylvania, from September 21 to 25, 2009. According to the The G20 Pittsburgh Summit Press Room, the selection of Pittsburgh as the site of the G20 summit is due to the city serving “as a model for economic and environmental transformation in the United States and abroad. The city has reinvented itself by building a balanced, innovation-driven economy based on its strengths in advanced manufacturing, financial services, information and communications technologies, health care and life sciences, education and research, and energy and environmental solutions.” The accomplishments of the city of Pittsburgh serve as a precursor to the critical issues confronting the G20 gathering.
For those unaware of the many issues confronting the G20 Pittsburg-summit, what follows is a short list of essays and interviews, including transcripts, that address several of the critical issues confronting the world's financial representatives and leaders that have come together in Pittsburg to discuss economic policies and address the global financial crisis.

The listing, though there are many other informative sources available, includes a list of informative and insightful interviews and essays from both the Brookings Institution and Peterson Institute for International Economics.

From the Brookings Institution:

G-20 Summit: Recovering from the Crisis

To enhance global coordination and to implement effective financial recovery policies, Brookings experts provide recommendations on how the G-20 can overcome current global governance and economic challenges.
 
Introduction » (PDF)
by Kemal Derviş, Vice President and Director, Global Economy and Development
Download the full report » (PDF)

Articles

The G-20 and the World Economy: Sink or Swim » (PDF)
Eswar Prasad recommends that the G-20 maintain momentum on reforming the international institutions and advance international regulatory reform for the betterment of the overall global economy.

Confronting the Protectionism Spawned by the Crisis » (PDF)
Chad P. Bown makes the case for re-affirming the G-20 economies’ commitment to the World Trade Organization and curbing trade-restricting policies created by the crisis.

The G-20 and IMF: Their Future Roles in the International Monetary System » (PDF)
Domenico Lombardi proposes that the G-20 should focus on supporting effective measures to reform the International Monetary Fund.

To the G-20: Don’t Overlook Africa During the Recovery » (PDF)
Ernest Aryeetey, Mwangi Kimenyi and John Page assess the impact of the financial crisis on Africa and urge the G-20 leaders to support African economic recovery and growth. 

Welcome to the New Era of G-20 Global Leadership » (PDF)
Colin Bradford and Johannes Linn assess the effectiveness of the G-20 summits and how to move the G-20 forward as the global steering body.

International Financial Redesign: A Latin American Perspective » (PDF)
Mauricio Cárdenas calls for international financial regulatory reform in order to address Latin America’s need for greater financial development and to prevent future crises.

The G-20 and Climate Change: Achieving Comparable Effort Through a Carbon Price Collar » (PDF)
Warwick McKibbin, Adele Morris and Peter Wilcoxen propose G-20 leaders to focus on the challenges associated with climate change negotiations leading up to the United Nations climate conference in December.
From the Peterson Institute for International Economics:
audio  Peterson Perspectives: Interviews on Current Issues

Simon Johnson says the Obama administration is not doing much to fix the financial system, and the G-20 summit may do even less.


Nicholas R. Lardy, analyzing the origins of the dispute with China over tire imports, warns that the fight could imperil future US-China economic and political cooperation.


Morris Goldstein says that Treasury Secretary Geithner's proposals for regulatory reform are a step forward that could be endorsed in principle at the G-20 summit in Pittsburgh.

See also Peterson Institute Update: Global Economic Prospects, Commentary on Pittsburgh G-20

Michael Mussa The United States and the world economy have embarked on economic recoveries that will gather strength in the second half of 2009 and proceed fairly strongly through next year and into 2011. These recoveries may not be quite as vigorous as earlier postwar recoveries following deep recessions, but they will surpass almost all current forecasts on the upside and will once again illustrate that steep recoveries tend to follow deep recessions. While most economic forecasters expect a tepid recovery, and some fear a "double dip" in which economies fall back into recession at an early stage, Mussa expects "a V-shaped recovery" to be the most likely course. He forecasts that real GDP growth in the world will be 4.2 percent in 2010, spurred in part by greater than anticipated growth in developing countries and emerging markets. Real GDP growth in the United States will be 4 percent by the end of next year. The US unemployment rate in 2009 peaks at or a little below 10 percent but will fall below 9 percent by the end of 2010. China and India, which have been leading the global recovery, will register growth rates of 8.3 and 6.4 percent, respectively, in 2009 and 9 and 7.5 percent, respectively, in 2010. Mussa's forecast for 2009 is modestly above corresponding forecasts by the International Monetary Fund (IMF) but considerably higher than the IMF forecasts for 2010. Economic performance over the next 16 months will reveal whether Mussa's "conservatively optimistic" view is correct. 
Read full paper [pdf] 

The G-20 is overlooking the more complex challenges that economic policy must confront as a result of the emergency measures undertaken since mid-2007. The exit strategy needs more international coordination in the form of: returning to a normal interest rate policy; shifting from discretionary fiscal stimulus to putting government budgets on sustainable paths; and withdrawing of banks' guarantees and state-ownership stakes. This type of international policy coordination is not only desirable but attainable, according to Adam Posen. He proposes that the G-20 leaders shed the notion that coordination gains are small, that the emphasis should be on discussion of policy measures and sequences, and that the measures agreed upon should consist of pragmatic steps. Working toward a pact on an exchange intervention standstill instead of a scheme for ongoing surveillance will ensure the G-20 gets through the exit from this crisis safely while providing the foundation for a more sound future regime. 
Read full op-ed

Simon Johnson The United States has been in a bubble-bust-bailout cycle since the late 1920s. During the most recent crisis, Ben Bernanke saved the financial system in the short term while exacerbating the long-term pattern of bubble-bust-bailout. A proposal unveiled by Treasury Secretary Timothy Geithner to reduce the number of agencies carrying out regulation and giving new powers to the Fed is unlikely to work, according to Peter Boone and Simon Johnson, who cite the proposal's inability to alter banks' incentive to take excessive risks.
The authors propose a four-part solution to the bubble-bust-bailout cycle that centers heavily on making bank owners more financially responsible for the risks they take. The first part of their solution is to sharply raise capital requirements at banks so shareholders have more at stake and feel that their money is truly at risk when a bank takes gambles. Second, the managers and boards of directors of financial institutions should be personally liable up to a reasonable sum when their companies fail—losing a portion of past salaries and bonuses while seeing their pensions reduced. Third, rules need to be put in place so that regulators and public servants are not financially conflicted. Finally, we need more assertive leadership at the Fed regarding broader system issues.
Read full article

Marcus Noland While the effects of liberalized trade in goods have received much attention, research suggests that the gains from liberalized cross-border movements of labor would be much greater. But cross-border migration raises a number of economic and ethical issues, from individuals' right to seek a better situation for themselves and their families to the social externalities of increased migration both for sending and receiving countries. These issues are a source of growing controversy in countries around the globe, but the lack of a multilateral mechanism to address cross-border migration ensures that individual countries will continue to respond haphazardly to migration and its effects, while the number of migrants only grows. 
Read full op-ed 

See also from the Peterson Institute of International Economics: Pittsburgh G-20 Commentary 

America Cannot Resolve Global Imbalances on Its Own
C. Fred Bergsten and
Arvind Subramanian
Financial Times,
August 19, 2009

The G-20: An Idea from India
Arvind Subramanian
Business Standard,
August 26, 2009

Pittsburgh Priorities
Edwin M. Truman
RealTime Economic Issues Watch,
September 8, 2009 


A Pat on the Back at Pittsburgh?
Michael Mussa
Peterson Perspectives Interview,
September 9, 2009 


G-20 Summit in Pittsburgh, IMF Meeting: What to Expect?
Simon Johnson
RealTime Economic Issues Watch,
September 10, 2009


Ahead of Pittsburgh, Little Progress on Financial Reform
Simon Johnson
Peterson Perspectives Interview,
September 16, 2009


Making Capital Rules Work
Adam S. Posen
Welt am Sonntag\
September 16, 2009

How To Prevent an Unruly Rush for the Exit
Adam S. Posen
Financial Times
September 17, 2009

Pressures on Obama at the G-20 in Pittsburgh
C. Fred Bergsten
Peterson Perspectives Interview,
September 21, 2009 


G-20 Thinking: In the Medium Run We Are All Retired
Simon Johnson
RealTime Economic Issues Watch,
September 23, 2009

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Wednesday, September 16, 2009

The China tires safeguard saga—to be continued

by M. Ulric Killion

China has termed the US move on tire imports as a serious act of trade protectionism; Photo/China Daily. 

The China tires safeguard issue may still be pending final resolution. In Washington, on June 2, 2009, the ITC hearing commences. It is a case filed by the USW Union on April 20, 2009, which alleges that an increase in Chinese tire imports have cost 7,000 US jobs. 

In response, the USW wants the Obama Administration to more than halve the number of imports from 46 million units last year to 21 million. The USW also wants the Obama administration to employ section 421 of the Trade Act of 1974, which requires the ultimate approval or rejection of the president even after a ruling of the US International Trade Commission (M. Ulric Killion, ITC rules against China - finds tire import surge (dumping) in US, June 20, 2009, citing Alec Zhu, Sino-US trade ties face a tough tire test, China Daily, June 9, 2009). 

A decision by President Obama was due on or before September 17, 2009. On September 11, 2009, President Obama announced his decision, when affirming the earlier decision of the ITC, while also imposing additional duties on tire imports from China. According to the White House, “The new duty will take effect on September 26 and comes in addition to an existing 4 percent duty. It would fall to 30 percent in the second year and 25 percent in the third year” (M. Ulric Killion, Obama slaps duties on tire imports from China, Sept. 13, 2009).  

China believes that the measure by the US, which runs counter to relevant WTO rules, is a wrong practice abusing trade remedies,” the Chinese mission to the Geneva-based body said in a statement (M. Ulric Killion, China wants WTO talks on US tariffs, Sept. 15, 2009). China also requested a WTO panel to investigate and rule on the case.  

In the interim, China also took steps toward imposing tariffs on American exports of automotive products and chicken meat; a move some characterize as “retaliation for President Obama’s decision late Friday to levy tariffs on tires from China” (M. Ulric Killion, China Moves to Retaliate Against U.S. Tire Tariff, Sept. 15, 2009).  

While “China quickly denounced the US move as a serious act of trade protectionism that violates WTO regulations” (China wants WTO talks on US tariffs), there are, of course, others such as some unions such as the USW, some US tire producers, some politicians and others that hail the decisions of both the ITC and Obama administration.

For all of these reasons, the issue of China tire safeguards remains pending.  Many anticipate that the present status of the issue and present US resolution may challenge future US trade relations, notwithstanding US credibility at the upcoming G20 meeting. Quoting a recent WTO news release (M. Ulric Killion, G20 governments refrain from extensive use of restrictive measures, but some slippage evident, 14 September 2009):
G20 Governments have refrained from extensive use of restrictive trade and investment measures in recent months but have continued, in a limited way, to apply tariffs and non-tariff instruments that have hindered trade flows, the heads of the OECD, UNCTAD and the WTO indicated in a joint report to G-20 leaders meeting in Pittsburgh later this month.
Secretary General Angel Gurria of OECD, WTO Director-General Pascal Lamy and UNCTAD Secretary General Supachai Panitchpakdi said trade rules and investment agreements have acted as a safety harness preventing the adoption of wide-scale protectionist policies. They welcomed the commitment by governments to continue open trade and investment policies while pointing out that world leaders, particularly those in the G-20, bear responsibility for ensuring that trade and international investment function as tools for economic recovery. The global crisis is not over, they said, and rising unemployment will undoubtedly spark further protectionist pressures in the years to come.
“We welcome the G20 governments’ commitment to maintaining open trade and investment regimes and their ability to withstand domestic protectionist pressures. International rules for trade and investment agreements ... are a source of opportunity in times of economic growth and a restraining influence in times of difficulty. It is in this latter role that the rules are serving us particularly well right now,” they said.
Tariffs, non-tariff measures, subsidies and burdensome administrative procedures regarding imports have been applied in recent months and these actions have acted as “sand in the gears of international trade that may retard the global recovery,” they said.
“It is urgent that governments start planning a coordinated exit strategy that will eliminate these elements as soon as possible,” said the heads of the three organizations.
______________________________________________________
For additional readings regarding the China tires safeguard issue, the following articles are available at M. Ulric Killion’s space’s blog.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Copyright © Protected - All Rights Reserved M. Ulric Killion, 2009.
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Wednesday, September 9, 2009

The ITC tire (tyre) decision and bridging divergent ways of economic life

by M. Ulric Killion


As observed by Xinhua news agency (Rational decision needed in settling China tire case, Sept. 3, 2009), “US President Barack Obama is due to decide in about two weeks whether or not to impose punitive duties on Chinese tire imports. Despite huge domestic pressure, the president is expected to make a rational decision to protect both US interests and overall China-US trade ties. The decision is due by September 17, with some trade protectionists insisting on imposing punitive duties of up to 55 percent on Chinese tyres to ‘save American jobs.’”




(Dealers negotiating beside a tire model at an auto part exhibition in Shanghai, May 21, 2008; Photo/Asianews photo).

The Approval/Rejection Dilemma
 
An issue of paramount importance is that this is the first “special safeguard investigation” on Chinese products under the Obama administration (Xinhua, Sept. 3, 2009). As such, the US decision on this case will be perceived as a strong indicator of the US-government policies toward Sino-US relations, especially future trade relations. While Chinese authorities wisely couch the issue in terms of the greater issues of multilateral trade, free and fair trade, and non-protectionist trade policies, there are those in the United States urging approval of the ITC ruling, thereby presenting a dilemma for President Obama and his administration, notwithstanding bipartisan politics. Those groups urging approval comprise unions such as the United Steel Workers (USW), some US tire producers, some politicians and others.

A dilemma for the Obama administration arises from the earlier decision of the International Trade Commission (ITC) that addressed the import of China-made tires. In Washington, on June 2, 2009, the ITC hearing commences. It is a case filed by the USW Union on April 20, 2009, which alleges that an increase in Chinese tire imports have cost 7,000 US jobs. In response, the USW wants the Obama Administration to more than halve the number of imports from 46 million units last year to 21 million. The USW also wants the Obama administration to employ section 421 of the Trade Act of 1974, which requires the ultimate approval or rejection of the president even after a ruling of the US International Trade Commission (M. Ulric Killion, ITC rules against China - finds tire import surge (dumping) in US, June 20, 2009, citing Alec Zhu, Sino-US trade ties face a tough tire test, China Daily, June 9, 2009).

As for the USW’s Section 421 petition, which is a petition filed pursuant to the Trade Act, the ITC issued its now controversial ruling: “by a 4-2 vote that a surge of low-priced consumer tires from China is harming the domestic industry.” It is an import surge that the USW alleged has caused “major job losses and plant closures in the United States” (Killion, June 20, 2009). 

On or before September 17, 2009, as earlier mentioned, President Obama, or perhaps more accurately, the Obama Administration is expected to make a decision, pursuant to section 421 of the Trade Act, which either approves or rejects the ruling of the ITC. A problem for the Obama administration is a growing wedge of opinions, both within and without the jurisdiction and borders of the United States, supporting both approval and rejection of the ruling by the ITC. 

A difficulty only enhanced by the fact of a multitude of reasons by those seeking either approval or rejection. Nonetheless, it is strongly intimated, when gauged by the news media reports, that the issue of approval or rejection of the ITC’s ruling is polarizing along the lines of protectionism, that is, US protectionist policies.

For instance, on the issue of approval or rejection of the ITC’s ruling, China appears, though many will disagree, to be promoting multilateralism, free trade, and removal of protectionist trade practices and barriers. According to Xinhua news agency (Sept. 3, 2009), “The case has become an opportunity for some politicians at the center of US partisan politics to make a show. However, the US government is strongly expected to take into account the long-term development of Sino-American trade relations in making its decision.” More notably, Xinhua writes: 
 
“If the punitive duties being called for by some politicians and trade protectionists are imposed, more than 10,000 Americans in the tire distribution and retail sectors may lose their jobs, along with about 100,000 Chinese manufacturing workers. In addition, US tire firms with investment in China will suffer. On these figures, punishing China's tire exporters will definitely lead to a lose-lose situation and requires strong opposition from both sides. 
 
Notably, accusations against Chinese tyres failed to win support from some American tire firms and unions. Some giant US tire manufacturers, including Cooper, have warned that mishandling the tire case may lead to further troubles.” 

In these respects, the official view from China appears to promote greater multilateralism in trade, genuine free and fair trade, and removal of protectionist barriers to trade. Ding Qingfen and Li Xing (Major trade test ahead for Obama with China tire ban) opined that following an acceptance of the ITC ruling, China Daily, Sept. 8, 2009) opined that following an acceptance of the ITC ruling by the Obama administration, “The high-level tariffs, which would effectively impose a ban, will keep Chinese tire imports off US roads, strip 100,000 local laborers of their jobs and potentially spark a series of special taxes by other nations and regions.” Ding and Li also opined that in response to an acceptance of the ruling that “China will likely take retaliatory measures against the US industries.” 
 
On the other hand, there is the view from the United States. As gauged by news media coverage, it is strongly suggested that the majority view is one of approval of the ITC’s decision. Thus, if the issue is, actually, reducible to simply protectionist versus non-protectionist trade policy, one suspects the majority of Americans, including union members and politicians, would opt for approval of the ITC’s decision.
 
A case in point is a recent article appearing in the Washington Post, which emphasized the loss of American jobs and wage differentials between Chinese and American labor. (Peter Whoriskey, As Cheaper Chinese Tires Roll In, Obama Faces an Early Trade Test, Washington Post, Sept. 8, 2009). As Whoriskey writes: 
 
“ALBANY, Ga. -- At the vast Cooper Tire plant here, workers heard for years about their rivals in Chinese factories. In meetings, managers urged employees to run production lines faster and more efficiently to help the company keep up. Overseas laborers were toiling for as little as 20 cents an hour, they were told, and working harder. 
 
Even more ominously, while browsing the aisles of Kmart and Wal-Mart, Cooper employees could see that, sure enough, the Chinese tires were cheapest. ‘They would have these meetings and say we’re up against the Chinese,’ said Larry Burkes, 29, who worked at the plant, which rises on the city’s outskirts just beyond a mobile-home park. ‘We’d hear it all the time: ‘They work for less.’ There was pressure.’ Now the plant that employed 2,100 people in this small south Georgia city is being shut down, and the troubles afflicting the U.S. tire industry are at the core of what many consider to be one of President Obama's first major decisions on trade policy.”
 
There is, of course, also the issue of US tire production. The Washington Post produced the following graphics demonstrating this shift in US tire production (Graphic: A Shift in Tire Production, Washington Post, Sept. 8, 2009). According to the Washington Post, “From 2004 to last year, the number of Chinese tires imported to the U.S. more than tripled.”


In other words, although the USW helped Obama to win the presidency, according to Whoriskey, there are other political forces at work; more particularly, he stressed the plight of non-union labor. It is also reasonable to suggest that Whoriskey’s article is typical of the US news media coverage, and the emphasis on the loss of US jobs, China-US wage differentials, factory closings, etc. However, although these concerns are genuine and deserve consideration by the Obama Administration, once the issues are so couched and prioritized, other key issues such as multilateralism, free and fair trade, Sino-US relations, etc, seemingly become loss in the shuffle or politics of the moment. This also serves as a reminder of earlier comments made by Obama’s US trade representative, Ron Kirk. As Jim Abrams earlier reported: Kirk, though supporting international trade in a broad sense, “has also made comments suggesting that protectionism might not be so bad after all” (Killion, June 20, 2009, citing Jim Abrams, Former Dallas Mayor Ron Kirk confirmed as US trade representative, Chicago Tribune/AP, March 18, 2009).
 
Divergent Ways of Economic Life
 
Assuming such polarization, there is another issue that the news media coverage seems to neglect. It is not so much an issue of simply whether approval or rejection is contingent on adopting or rejecting protectionist trade policies, or even an issue of they (China) versus us (the United States). This is because another underlying issue is more plainly stated as an issue of their way versus our way. The idea of their way versus our way intends to reflect conflicting ways of life; more particularly, divergent ways of economic life between the two countries.
 
As recently observed by the former US trade representative and now World Bank Group President Robert B. Zoellick, “China has steered a steady course through the stormy seas of the economic crisis.” According to Zoellick, this is because, “Through its massive stimulus and strong lending program, China has contributed to the early signs of a global recovery by keeping its growth rate up. With growth in China now projected at close to 8 percent for 2009 as a whole, and signs of stabilization in many other economies in Asia and around the world, the chances of a truly global recovery have increased measurably” (M. Ulric Killion, World Bank - China Playing Important Role in Steadying World Economy, Zoellick Says / 佐利克说中国在稳定世界经济中起着重要作用, Sept. 9, 2009).
 
When relating the chances of a truly global recovery to positive contributions made by China, Zoellick reminds us of the critical importance of positive Sino-US trade relations. It is a growing economic interdependence deserving critical consideration by the Obama administration, when addressing the issue of approval or rejection of the ITC’s decision addressing the import of China-made tires.
 
China, especially the Chinese way of economic life, is possibly proving to be a model for success as it weathers the post-subprime global crisis (or financial crisis) better than most, just as it did during the earlier East Asian financial crisis (1997-98). In this respect, China’s way of economic life serves as a model to emulate, rather than challenge by US protectionist trade policies and barriers. Indeed, there are lessons to learn from China.
 
The current success or rebound from the financial crisis is partially due to the Chinese way of economic life. In the context of China, their way of economic life, actually, minimized the fallout from the US subprime mortgage crisis, notwithstanding China’s economic policies. For instance, this is because the Chinese way of economic life generally promoted higher saving rates (about 40% of net income), greater numbers of home owners (about 60%), and other measures of frugality in general; all of which are in stark contrast to the  numbers in the United States.
 
For these reasons, the Chinese way of economic life might deserve emulation. Moreover, in the United States, in the wake of the financial crisis America consumers are now demonstrating an increasing degree of frugality, in the American way of economic life. In addition, the financial crisis does not have its origins in China, nor did China’s export-based economy cause the financial crisis. According to Deng and Li (China Daily, Sept. 8, 2009), “China's GDP grew by 6.1 and 7.9 percent during the first and second quarter. While the US unemployment rate remains high and has been climbing since last April, the US expects to gain from China's high economic growth.” Deng and Li, more importantly, explained that the “Chinese economy has rebounded significantly without having to rely so much on exports.” 
 
The financial crisis (or US subprime mortgage crisis) has its origins partially in the American way of economic life. However, it is the Chinese way of economic life that partially contributes to an early rebound from the financial crisis, while also allowing China, as Zoellick explained, to increase the chances of a truly global recovery. 
 
It is also for these reasons that the Obama administration must proceed with caution on approving or rejecting the ITC’s ruling on the import of Chinese tires. An approval of the ITC ruling challenges the success of China’s way of economic life, misplaces the blame for the US subprime mortgage crisis, challenges the chances of a truly global recovery, denies the reality of the American way of economic life (i.e., a model of a consumer driven economy), and also, inevitably, challenges the goals and aspirations embodied in the world multilateral trade system (i.e., multilateralism, free and fair trade, reduction in trade barriers, etc). Conversely, a rejection of the ITC’s ruling enhances the chances of a truly global recovery, by promoting multilateralism in trade, free and fair trade, and a reduction in trade barriers (i.e., protectionist trade policies and barriers).
 
The answer to the woes of an American way of economic life lies neither in protectionist trade policies and barriers, nor in misplacing the blame for a US subprime mortgage crisis on the Chinese way of economic life. As earlier mentioned, the Obama administration must proceed cautiously when approving or rejecting the ITC ruling. This is because of the larger or global implications that associate with an approval of the ITC decision, including the goals and aspirations embodied in the world multilateral trade system. As Mohamed Sid Ahmed succinctly observed, “The United States cannot move out of history and be at the same time its most authentic contemporary expression.” (Mohamed Sid Ahmed, The Kagan Thesis (3) - Beyond Fukuyama and Huntington?, Al-Ahram Weekly On-Line No. 602, Sept. 11, 2002).
_____________________________________
See also M. Ulric Killion, In Tire Tariff Case, Obama Faces First Chinese Trade Policy Test, Aug. 21, 2009.
 
See also M. Ulric Killion, China sends envoy to Washington on tire case, Aug. 19, 2009.
 
See also M. Ulric Killion, U.S. distributors deny Chinese tires disrupted market, Aug. 10, 2009.
 
See also M. Ulric Killion, Tariffs on Chinese tires to hurt US consumers: producers, Aug. 6, 2009.
 
See also M. Ulric Killion, China: U.S. gov't should seriously consider tire protectionism, Aug. 5, 2009.
 
See also M. Ulric Killion, ITC rules against China - finds tire import surge (dumping) in US, June 20, 2009.


Copyright © Protected - All Rights Reserved M. Ulric Killion, 2009.
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Sunday, September 6, 2009

WTO Airbus ruling, and issues of multilateralism, fair trade, and subsidies and countervailing measures

by M. Ulric Killion

An Airbus A380 from Singapore Airlines; Photo/Mike Clarke/Agence France-Presse — Getty Images.

On Friday, Aug. 4, 2009, in reference to ongoing dispute between the United States and the European Union (EU), the World Trade Organization (WTO) rendered a decision, or more accurately, a preliminary report setting limits on government support for civil aircraft makers. The dispute, more particularly, addresses the dispute between Boeing (in the United States) and Airbus (in the European Union).

However, there are economists and industry analysts that now perceive the earlier relevancy of this dispute as having waned over the past years. According to Nicola Clark (New York Times, Five-Year Dispute on Aircraft Claims Loses Its Urgency, Sept. 3, 2009),
But it is coming, economists and industry analysts say, too late to make much difference. . . While the findings may be a watershed in a case that, by many measures, is the largest and most expensive to be heard by the global trade body, analysts say the dispute’s relevance has faded as new airplanes are increasingly being designed and built in several countries.
And even if the W.T.O. forcefully declares Europe’s support for Airbus illegal, the process of resolving both claims would take many more years before any actions could be taken.
Some analysts also say it would be hypocritical to provoke a trade war over subsidies for airplanes after hundreds of billions of taxpayer dollars and euros were given to failing banks and automakers on both sides of the Atlantic in the last year.
With Airbus and Boeing globalizing production even more — and other countries like China and Japan expanding their domestic industries — several analysts say the Americans and Europeans would be better off seeking a negotiated settlement.
‘Lots of governments are interested in having a piece of the civil aircraft construction business, so much of the aircraft produced today is not manufactured in the country with the nameplate,’ said Gary Clyde Hufbauer, a trade specialist at the Peterson Institute for International Economics. ‘This introduces a whole new level of complexity’ (Clark, 2009).
Moreover, Clark (New York Times, 2009) also observed that companies such as Boeing and Airbus by virtue of increasing industry competition now routinely outsource a larger share of their manufacturing to international partners, while also increasingly relying on suppliers from other countries.

On Sept. 5, 2009, the WTO did issue its ruling that the EU provided illegal subsidies to Airbus for its aircraft. From the perspective of the United States and Boeing, and according to House Democrat (Representative/State of Washington) Norm Dicks, the ruling confirms the 2004 U.S. complaint that “all Airbus aircraft have received illegal subsidies and that these have caused material harm to Boeing.”

As Agencies (WTO rules for US in case over Airbus subsidies, Sept. 5, 2009) reported, “The WTO handed its interim ruling to the US and European Union, but didn't reveal the results partly because of the sensitive company information contained in it. Both Washington and Brussels confirmed they received the ruling.” Moreover, given that the WTO ruling is an interim decision, the EU can appeal the ruling. An appeal by the EU means that Boeing and Airbus will have to wait until next year for a decision, which prompts many analysts to suggest that the ongoing disputes will more likely eventually resolved by direct negotiations between the two companies, rather than a final decision by the WTO.

In the interim, following the issuance of the WTO ruling or preliminary report finding “that Airbus received illegal subsidies for the $13 billion A380 superjumbo jet and several other airplanes, hurting Boeing in the battle for sales,” both Boeing and Airbus, actually, declared a victory. As earlier stated, for U.S. Representative Dicks, it is a “broad ruling in Boeing’s favor.”

Nicola Clark and Christopher Drew (W.T.O. Says Aid to Airbus for A380 Was Illegal New York Times, Sept. 4, 2009) reported, “[Norm Dicks] said that the W.T.O. found that a substantial amount of the low-cost loan money, known as launch aid, that European governments provided to develop the A380 jet was illegal and should be repaid by Airbus. Mr. Dicks said a panel of experts from the trade organization found that other series of Airbus planes — the A300, A310, A320, A330 and A340 — also benefited from similar improper subsidies.”

Then there is the EU’s perspective of a victory; as “The Europeans stressed, however, that the W.T.O. had rejected many of the specific arguments that were in the complaint” (Clark and Drew, 2009). Consequently, the WTO’s preliminary ruling is more or less a victory for Chicago-based Boeing. This is because the Airbus company (whose parent company European Aeronautic Defense and Space Company N.V. is partnered with Northrop Grumman Corp.), which also perceives the preliminary ruling as a victory, can appeal the ruling, and will probably do so. A consideration for both companies is an appeal process that will extend the finality of this dispute for yet another year. In this respect, economists and industry analysts may rightly perceive this dispute as eventually subject to finalization only by direct negotiation between the two companies.

The history of the dispute between Boeing and Airbus dates back to 2004. The issue of government support for civil aircraft makers, such as Boeing and Airbus, still enjoys modern relevance. This is because the issue uniquely focuses on the discussion of unilateralist trade policies by developed countries and economies. In 2004, the WTO trade regime witnesses an increase in protectionist trade activity by both developed and developing countries and economies. For instance, during this earlier period, developing countries such as China, South Korea, Brazil, Mexico and others were increasingly employing unilateralist approaches to trade. In addition, during the same period, there were developed countries such as Australia, Canada, the EU, and even the United States also employing protectionist trade policy (internal citations omitted) (Ulric Killion, Modern Chinese Journey to the West, Chapter 9, (2006)).

In particular, in terms of the United States, Section 301 of the Trade Act of 1974 has always presented a major problem in fostering multilateralism. This is mostly due to the mandatory retaliation action provision of the Trade Act that, actually, lends to, if not promotes, unilateralism in trade. There is also the then and continuing relevancy of governments subsiding aircraft producers such as Boeing and Airbus. This is because the case of the EU subsidizing the manufacture of Airbus aircraft would present the largest subsidy case in WTO history. The United States earlier argues that EU members have subsidized Airbus through financing at sub-market rates, assumption/forgiveness of debts, equity infusion, and/or other grants. All of which, from the perspective of the United States, violated the WTO Agreement on Subsidies and Countervailing Measures (SCM). As a result, as early as 2005, the United States’ request for a WTO panel was partly triggered by the EU’s commitment of $1.7 billon in launch aid for Airbus (Killion, 2006).

In the end, the dispute between Boeing and Airbus also appears hardly likely to resolve the greater issues of multilateralism versus unilateralism in trade, free and fair trade versus protectionism, and the issues of government subsides in trade and violations of the WTO Agreement on Subsidies and Countervailing Measures (SCM). This is a long contested trade dispute that problematically now presents both opponents, or the two companies, as perceiving a reading of the preliminary ruling as a victory. As such, the WTO’s ruling is far from resolving the greater issues surrounding the origins of this 2004 dispute.

Copyright © Protected - All Rights Reserved M. Ulric Killion, 2009.
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Tuesday, September 1, 2009

Sale of Hummer to Chinese company still pending

by M. Ulric Killion

In early June of 2009, General Motors Corp. (GM) announced the confirmation and details of its proposed transaction, or perhaps more accurately, the memorandum of understanding (MOU) for the sale of the off-road Hummer brand, along with a senior management and operational team (Shenzhen Evening News, 悍马被卖了，买家是中国民营企业, 2009年06月03日, Hummer sold to a Chinese company). GM announced that the buyer will be a privately owned Mainland China company, which is Sichuan Tengzhong Heavy Industrial Machinery Co., Ltd (Tengzhong, 腾中重工) (Shenzhen Wan Biao, June 3, 2009). (Photo/GM Hummer.com). 

Under the terms of the proposed agreement or MOU, Tengzhong will assume existing dealer agreements that relate to Hummer’s dealership network. Tengzhon will also execute a long term contract assembly and key component and material supply agreement with GM. In addition, GM, though the final details of the agreement are still pending, also earlier announced that it anticipates that the agreement will help to secure more than 3,000 US job. 

As for Sichuan based Tengzhong, according to its CEO, Yang Yi, “The HUMMER brand is synonymous with adventure, freedom and exhilaration, and we plan to continue that heritage by investing in the business, allowing HUMMER to innovate and grow in exciting new ways under the leadership and continuity of its current management team.” Yang Yi further announced, “We will be investing in the HUMMER brand and its research and development capabilities, which will allow HUMMER to better meet demand for new products such as more fuel-efficient vehicles in the U.S.”

(Photo/Danwei.org).

Hummer, pursuant to earlier terms, though still pending finalization, will continue to maintain its headquarters and operations in the United States, while also continuing under the management of its present leadership team. The Hummer management team intends to expand Hummer’s dealer network worldwide, including a new market in China. 

The parties to the pending agreement intended to close the deal by the third quarter of 2009. However, Tengzhong is still waiting for approval of the terms of the agreement from China’s government. As of August 2009, China government officials, who refused to be named, when commenting on recent media reports of approval by China’s Ministry of Commerce (MOC) announced that the government has not yet given approval for the transaction or MOU (Xinhua, Chinese company’s purchase of Hummer not yet approved: Officials, Aug. 24, 2009). 

As Xinhua (2009) reported, “Sichuan Tengzhong did not say in its application to the National Development and Reform Commission that it would produce Hummer in China, or acquire Hummer's assets or stake in parent company General Motors (GM). An MOC official also denied media reports the ministry had given a green light to the deal, saying Tengzhong had only said it would purchase the Hummer brand in its application. The ministry has asked Tengzhong to make clear whether it intended to buy the Hummer's patent or its technology.” 

Although these privately owned companies (GM and Tengzhong) mutually perceive benefits (i.e., profit, profit maximization, growth potential, employment opportunities, etc.) attributable to finalization of the terms of the agreement or MOU, the concerns of China’s government (i.e., production in China, Tengzhong acquiring assets of parent-GM, Tengzhong acquiring Hummer patent/technology) may, ultimately, constitute deal breakers. 

As for the concerns of the US government, there are, of course, the paramount concerns of the survival of GM following its July 10, 2009 emergence from a Chapter 11 bankruptcy reorganization, and also GM's plan to make an initial public stock offering (IPO), which will occur in 2010 (John D. Stoll and David McLaughlin, General Motors Aims for IPO Next Year, Wall Street Journal, July 2, 2009), notwithstanding the potential loss of more jobs in America. 

Moreover, one reasonably suspects that there are parties on both sides of the great transpacific, and within and without the governments of the United States and China, who either approve or disapprove of the finalization of the proposed transaction between GM and Tengzhong. For these reasons, the pending transaction is interesting, while also, eventually, presenting what will be an interesting episode in free and fair trade confronting protectionist trade policies and barriers on both side of the transpacific (i.e., the legislative-enacted Buy American variety, and the Buy China requirement as an inclusion in its domestic stimulus package, see cf. M. Ulric Killion, The Chinese trade regime: will the prey become hunter or vice versa?, Aug. 8, 2009). 

Copyright © Protected - All Rights Reserved M. Ulric Killion, 2009.
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